COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA
Case No: 69/LM/Sept02
In the large merger between:
Clicks Pharmaceutical Wholesale (Pty) Ltd
and
New United Pharmaceutical Distributors (Pty) Ltd
Reasons for Decision
_________________________________________________________________
APPROVAL
On 5 December 2002 the Competition Tribunal issued a Merger Clearance
Certificate approving the merger between Clicks Pharmaceutical Wholesale (Pty)
Ltd and New United Pharmaceutical Distributors in terms of section 16(2)(a). The
reasons for the approval of the merger appear below.
The Parties
i.The acquiring firm is Clicks Pharmaceutical
Wholesale (Pty) Ltd (“CPW”) 1. It is a wholly
owned subsidiary of the Clicks Organisation (Pty)
Ltd, which is ultimately controlled by New Clicks
Holding Limited (“New Clicks”), a publicly listed
investment holding company, comprising many
institutional and individual investors.
2. New Clicks is a company with operations in South Africa and Australia.
trades through the brands Clicks, Discom, CD Wherehouse, Musica,
Priceline and the Body Shop. Only the Clicks brand is relevant to this
merger assessment.
3. New Clicks further has a 56% interest in the Link Investment Trust (“LIT”)
1 This was incorporated in 2000 but has never traded and remains a dormant company.
and a financing arrangement with Purchase Milton & Associates (“PMA”).
These relationships are elaborated further below. 4. The target firm is
New United Pharmaceutical Distributors (“NUPD”). The shareholding
and subsidiaries of NUPD is set out in the diagram below. 2 NUPD operates
as a wholesaler of scheduled and unscheduled substances and patent
products3.
Premerger shareholding in and subsidiaries of NUPD :
The Merger Transaction
4. The transaction entails Clicks ( the retailer) acquiring certain assets and
2 Medicom Commercial Consultants(Pty) Ltd provides IT services to NUPD; Multicare Health Centre (Pty)
Ltd operates as a holding company and Multicare Pharmaceutical Benefit Management (Pty) Ltd and
Multicare Western Cape operate as buying groups for various independent retail pharmacies.
3 The latter includes alternative medicines, baby products; confectionary, toiletries, first
aid, foot care, general toiletries, hair care, household, sport, health nutrition, veterinary,
patent medicines, skin care, special foods. Patent products refer to branded non
pharmaceutical products sold by NUPD. More on the distinction is set out below.
Standard
Merchant Bank
Investments
Gensec NSA
Equity Fund
Nominees
Management of
NUPD – see p
118
35%39% 26%
JR 163 Investments
100%
NUPD
100% 80% 100% 100% 100%
Medicom (IT) Multicare
Health
(holding)
Multicare
Pharmaceutical
Benefits (buying
group)
Multicare Western
Cape (buying
group)
Pharmacy Property
Management Services
(property)
liabilities from NUPD (the wholesaler) relating to its business as a
wholesaler of scheduled and unscheduled substances and patent products.
NUPD is being acquired as a going concern. In terms of the sale of
business agreement, New Clicks nominated CPW to be the purchaser.
Postmerger CPW will own and control the NUPD business and CPW will in
turn be indirectly controlled by New Clicks.
Rationale for the Transaction
5. The parties assert that the merger will afford NUPD greater growth
opportunities whilst its bargaining power in relation to suppliers will be
enhanced.
6. It aligns with New Clicks’ longterm strategy with regard to healthcare. To
the extent that Clicks has its own internal distribution capacity, namely bulk
distribution, they will not integrate their activities with those of NUPD but
rely on expertise and advice from NUPD with respect to bulk and fine
distribution. Accordingly, there are synergistic benefits insofar as NUPD is
familiar with distribution at the wholesale level, whilst Clicks’ area of
expertise is predominantly at the retail level.
The Relevant Market
7. Clicks retails lifestyle, beauty and health products to the endconsumer.
NUPD distributes scheduled and unscheduled pharmaceutical and patented
products to retailers. 4 The two firms operate in different levels of the supply
chain, a vertical relationship, even though there is currently no relationship
between the two entities. There is no overlap between NUPD and Clicks in
the wholesale market. Clicks sells only to the endconsumer, whilst NUPD
distributes to retailers. 5 There is no overlap in retail either, since NUPD
does not distribute to final consumers. The Commission nevertheless
examined the relevant markets to test whether in either the downstream or
examined the relevant markets to test whether in either the downstream or
upstream markets, either firm is dominant.
8. The Commission examined both the upstream ( wholesale distribution )
and downstream ( retail distribution ) markets. In respect of wholesale
distribution, there was further division into scheduled on the one hand and
unscheduled and patented pharmaceuticals on the other hand. In the retail
market, the Commission looked at the retail distribution of health, lifestyle
and beauty products.
4 NUPD does wholesale certain scheduled substances and unscheduled substances and patent products that
are substitutable for certain health, beauty and lifestyle products retailed by New Clicks.
5 Mention is made of Clicks having its own bulk distribution facilities but this is only for distribution
to its own stores.
9. The distinction between scheduled and unscheduled pharmaceuticals is
laid down in terms of the Medicines Control Act, since the former are
subject to various regulatory and control requirements. 6 They are
controlled in terms of dispensing, delivery conditions, storage conditions
and usage. They are distributed by means of “fine distribution” methods, a
term of art, referring to delivery of high value scheduled drugs in frequent
and smaller batches. By contrast, there are no such stipulations laid down
in respect of nonscheduled pharmaceutical products. They can be
distributed by anyone without any formal storage or delivery procedures,
typically by bulk distribution methods. Patent products are included in the
unscheduled category.
Impact on competition
10. Notwithstanding the lack of overlap between the activities of the merging
parties, we set out below the competitive position of each, relative to their
competitors in the upstream and downstream market, respectively.
Upstream Market
Wholesale distribution of scheduled pharmaceutical products
Firm Market share
NUPD Group 8%
International Healthcare Distributors 35.28%
Kinesis Logistics 25.33%
Adcock Ingram 13.15%
Pharmaceutical Healthcare Distributors 7.4%
Free State Buying Association 3.56%
Transfarm 1.83%
Natal Wholesale Chemists 1.64%
Pharmed .71%
Létangs .69%
Resepkor .05%
11. The barriers in this market are relatively high on account of specific
regulatory requirements with respect to specialised delivery systems for fine
distribution as well as sophisticated, capitalintensive batch tracking
processes. Nevertheless NUPD has a market share of approximately 8%.
IHD is the dominant competitor in this market and there are 9 other
competent competitors.
6 Medicines are defined in terms of the Medicines Control Act No 101 of 1965.
Wholesale distribution of unscheduled pharmaceutical products
12. The estimated market share of NUPD is less than 10%. The parties were
not able to provide market shares, but indicated that their competitors
included:
Tibbett and Britten
Specialised Consumer Services
Interhold Limited (Metro Cash and Carry)
Massmart Holdings (Makro)
Free State Buying Association (Alpha Pharm Bloemfonteing)
Natal Wholesale Chemists
Adcock Ingram
Free State Buying Association (Alpha Pharm Eastern Cape)
13. The parties gave an estimate of NUPD’s market share being well below
10% when one has regard to the number and variety of alternative suppliers
of such products. The nonscheduled pharmaceutical market has low
barriers to entry because there is no need for fine distribution but firms can
distribute in bulk. Pharmacies can, in addition to the various other avenues,
source these products from large retailers such as Pick and Pay. NUPD is
not dominant in the upstream market.
Downstream market
14. In this market the market position of Clicks is analysed, insofar as they sell
lifestyle, beauty and health products to the final consumer. The parties were
unable to furnish market shares in respect of each discrete category. Some
reliance was made on a market report by AC Nielsen, which comprised
statistics from Clicks, Pick ‘n Pay Family Stores and Woolworths in respect
of various product categories, including inter alia , household, toiletry and
health products. However, to the extent that other alternative suppliers of
the same products in each category were omitted from this evaluation, we
accept that Clicks market share figures may be inflated.
Lifestyle products
15. Nielsen estimated this at approximately 15% but did not account for some
products being sold by retailers such as furniture stores. The parties in their
Competitiveness Report estimated market share in this category to be 10%
Competitiveness Report estimated market share in this category to be 10%
or less. Certain specialised grocery and discount chains were also
excluded. The Commission indicated that, on investigation, Clicks’ share
was probably less than 1% of the broader lifestyle market 7.
7 No market shares were given but instead contribution of each subcategory of lifestyle product to
o Beauty products
16. AC Nielsen estimated Clicks’ market share at 14%. The management of
New Clicks estimated it at between 8 and 10%. Once again, there are a
proliferation of competitors in the market, including the large and smaller
grocery retail chains which were not taken into consideration.
o Health products
17. Nielsen estimated this to be around 22%, since it excluded health products
sold by retail pharmacies. Management of Clicks estimated this at between
8 and 12%. Once again, there are a variety of competitors in this market,
including grocery chains and independent health shops.
18. There are no barriers to entry in the nonscheduled and patent product
market since no regulatory requirements or stipulations exist with regard to
how products are stored. Countervailing power exists in the form of large
buying groups, retail and wholesale chains, informal traders, pharmacies
and health shops. For instance, significant competitors of New Clicks in the
retail of lifestyle, beauty and health products include Pick ‘n Pay, Shoprite
Checkers, Superstar, numerous pharmacies and health stores, Woolworths,
Stuttafords, Edgars, Truworths, Foschini, @ Home, Mr Price Home, Game,
Makro. There are no exclusive supply agreements between either of the
parties.
19. From this analysis we can conclude that there are no dominance concerns
in the downstream market either.
20. Further, there are numerous other procompetitive aspects identified from
the parties’ papers:
The proposed merger will allow NUPD, through access to Clicks’ range of
multinational suppliers and enhanced bargaining power, to increase its
product range, (as it states, become a “fullline wholesaler” again) affording
customers access to a wider variety of products;
Further, the parties view the merger as necessary in a market where
manufacturers are exerting their collective muscle against wholesalers and
manufacturers are exerting their collective muscle against wholesalers and
wholesalers having to in consequence consolidate amongst themselves
alternatively form alliances with retail pharmaceutical chains, an essentially
proactive strategy.
Clicks’ total revenue.
Pharmacies
21. Click’s elaborated on its relationship with PMA and LIT, which it frankly
described as facilitating its corporate participation in the retail
pharmaceutical sector. It has an interest in the LIT, a franchisor for the Link
Group of pharmacies, a group of pharmacists and other members who
operate 307 Linkbranded pharmacies across South Africa. Clicks
reassured that it merely owns the Link brand but does not presently control
the Link branded pharmacies which are independent. It further provides
arm’s length shortterm services to the Link pharmacies. The relationship
with Purchase Milton & Associates (“PMA”) is a commercial one. The PMA
is described as a flagship pharmacy company of Clicks and operates 76
pharmacies within South Africa. Clicks provided loan finance to the
company to facilitate the purchase by PMA of various pharmacies 8.
22. The merged firm will not however have the ability post –merger to influence
the distribution strategies of either the Link or PMA pharmacies because it
lacks the legal or commercial ability to control them. For this reason
foreclosure strategies that vertical mergers can sometimes give rise to, are
unlikely here.
23. Nevertheless these relationships caused various pharmacies to voice
concern about potentially anticompetitive practices arising in the event that
Clicks enters the retail pharmaceutical sector.
24. Currently, the Pharmacy Act No. 53 of 1974 governs the licensing and
owning of pharmacies. There are steps afoot to change this and allow
corporates to own pharmacies. In the event of pharmacy ownership being
deregulated, Clicks would open up dispensaries in its Clicks and Discom
branded stores. If this occurred, Clicks would compete with pharmacies at
branded stores. If this occurred, Clicks would compete with pharmacies at
retail level and simultaneously, through its joining with NUPD, would supply
them with pharmaceuticals at the wholesale level. While this is not relevant
to this merger, it is likely that Clicks will want to use this transaction to
facilitate its entry into the pharmaceutical market, so that when it starts
retailing scheduled pharmaceuticals, it has its own distribution network to
source them. The likelihood of this occurring is uncertain and has no
impact on this merger assessment. If and when deregulation of the industry
occurs and Clicks acquires any pharmacies in which it presently has an
interest, this will form the subject of a separately notifiable transaction/s and
will be dealt with accordingly.
8 The rationale for Clicks’ relationship with PMA is to do with its anticipation of deregulation of pharmacy
ownership, whereupon, in terms of an agreement with PMA, it might later acquire some of these
pharmacies. The association further involves certain service level agreements which facilitate Clicks
providing specified support services. It has no preemptive rights in respect of Link pharmacies.
Conclusion
No deregulation has occurred as yet and we cannot speculate into the future. As
to when this might happen. It suffices for the purposes of this merger, that we
conclude that the merger will not lead to a substantial lessening of competition.
The Tribunal therefore is justified in approving the transaction unconditionally.
There are no public interest concerns which would alter this conclusion since the
NUPD business is being acquired as a going concern.
_____________ 13 December 2002
N. Manoim Date
Concurring: D.Lewis, U. Bhoola
For the merging parties: Sonnenbergs Attorneys
For the Commission: M. Sebothoma, I. Dhladhla, Competition Commission